Here’s one question that should be animating the debate about the teacher pensions mess in Illinois: If you’re a 25-year-old teacher hired this year, are you absolutely sure you will still be teaching somewhere in the state in the year 2040?
Most teachers can’t answer that question affirmatively. A quarter century is a long time. But that’s how long a newly hired teacher must wait before she’ll qualify for a decent pension. While large budget deficits grab all the headlines, Illinois teachers are being shortchanged.
Teachers unions must be up in arms about such poorly constructed retirement schemes for their members, right? You might think so, yet Springfield is consumed by budget conversations, not how poorly teachers are being served by the current system.
The state is facing massive pension debt. State politicians have promised $113 billion more in future pension benefits than they have saved to pay for them. The teacher pension system alone makes up over half of the debt, with a total unfunded liability of $63 billion.
(Chicago teachers have their own pension fund, with nearly the same rules and results.)
These issues, while real and pressing, ignore a longer-term problem—the pension system is inequitable and inefficient. According to the pension plan’s own assumptions, over half of new Illinois teachers won’t qualify for any pension at all. They will leave before the 10-year service requirement to qualify for any pension.
Even for teachers who do qualify for benefits, the odds aren’t in their favor. Because of post-recession pension cuts, new teachers are given a bare-bones retirement plan. In fact, on average new teachers will pay more into the system than they’ll ever get back in return. As a group, they’re paying a tax for the privilege of receiving negative retirement benefits.
But there are other options.
The state could decide to allow new teachers to participate in a defined contribution plan like the one offered to employees in the Illinois State University Retirement System (SURS). The SURS-defined contribution plan is much cheaper than current teacher pension plans, but it accrues no debt, is fully portable, and provides more equitable benefits than the existing plan.
The graph below compares the SURS-defined contribution plan with the pension plan offered to new teachers hired as of 2011 (called “Tier II”). For both plans, it assumes the teacher begins her career at age 25. The blue line shows the total accumulated retirement wealth under the state’s pension plan. Under the current arrangement, teachers begin qualifying for pension payments after 10 years of teaching, but their actual benefit remains very small many years into their career. Finally, once they’ve taught for 30 years or more, the value of their pension rises rapidly, only to plateau as they reach the normal retirement age. At that point, every year they continue teaching is a year they could have drawn a pension, so the pension system subtly encourages them to retire. This system currently requires combined employee and employer contributions of 43.8 percent of each teacher’s salary. Most of that is paid by the state.
In contrast, the defined contribution plan offered to SURS employees requires only a 5-year vesting period, and it costs only 15.3 percent of salary, split evenly between workers and employers. The graph below estimates the value of the SURS plan if workers earn an investment return of 6.5 percent (imagine if they could earn the 7.5 percent the pension plan assumes!).
As the graph shows, teachers would have vastly improved benefits under the SURS plan at nearly every experience level. This at a fraction of the cost of the existing pension system.
Illinois teachers do not participate in Social Security. In this, they are an outlier. About 160 million American workers are covered by Social Security, including all private-sector workers in Illinois, as well as workers for the Chicago Transit Authority, those covered by the Illinois Municipal Retirement Fund, and most non-public safety state workers. Social Security may have its own problems, but nearly all American workers have a stake in preserving it. Illinois teachers, however, aren’t among them, which makes fixing their shaky pension situation all the more important.
Besides being bad for teachers, Illinois’ pension systems are also bad for all other state residents. The state spent $3.6 billion last year paying off pension obligations. That’s equivalent to over a third of the state’s budget for K-12 schools, or nearly 50 percent more than what Illinois spends on its public colleges and universities. As a result, Illinois colleges have been busy laying off workers, increasing student tuition prices, and cutting academic programs. This is merely the latest sign that rising pension costs are cutting into public services all across the state.
Even if the state somehow gets through the current budget crisis, it still wouldn’t solve the problem of how benefits are delivered to teachers. It’s easy to understand why teachers are upset. The current shortfalls have been caused by decades of irresponsible actions by state politicians, not teachers.
The answer to this conundrum is not to keep pouring money into a volatile pension system. Illinois teachers deserve a solution that addresses both the long-term fiscal pressures and ensures all teachers are enrolled in a fair, efficient retirement system that is aligned with today’s labor market.